Investor association questions Diageo's conduct on USL fund diversion

The Institutional Investor Advisory Services demanded to know why Diageo was silent to Mallya's alleged wrongdoings

Institutional Investor Advisory Services (IiAS) has blasted British liquor major Diageo for remaining silent on the alleged fund diversion from United Spirits Ltd to UB group for the last two years even when UB group chairman Vijay Mallya was declared a wilful defaulter by an Indian bank. While the IiAS asked Mallya to step down from USL, it questioned the role of USL’s auditors and Diageo’s silence and its corporate governance practices.

The IiAS asked whether Diageo can claim to have not known about intra-group transactions when due diligence was done by Deloitte, an audit company. “What compelled Diageo to not run a thorough due diligence, and miss asking the obvious questions? Why did Diageo vote its shares in favour of reappointing Mallya at a time when he was named a wilful defaulter and what prompted Diageo to nominate P A Murali (USL’s chief financial officer who resigned this month) to the board as their representative? If P A Murali was Diageo’s representative, can Diageo claim they were not in the know?,” the IIAS asked.

IiAS believes that auditors must be asked to justify their audit quality. Auditor rotation typically brings fresh oversight, thereby enhancing the quality and the objectivity of the audit process. However, in USL’s case, the two changes in auditors yielded no results.  “Moreover, the audit firm that conducted the forensic audit was the auditor for the period within which the alleged irregularities occurred. Do shareholders rely on PricewaterhouseCoopers’s statutory audit or PwC’s forensic audit?” it asked about the conflict of interest between the two arms of PwC — whose two auditors were found guilty of cooking Satyam's books by a Hyderabad court this year.

"While there are several questions, more will unfold as findings of the forensic audit come to light and USL restates its books," it said.

IiAS said the FY14 financial results were delayed three times as the audit committee had sought clarifications and information on the draft financial results and related issues. The results were delayed by more than three months and were declared on  September 4, 2014, and USL posted a record loss of Rs 4,490 crore on account of reduction in the value of investment in Whyte & Mackay (W&M) and write-offs on loans and advances extended to United Breweries group companies. USL sold W&M last year.

Instead of conducting an enquiry, IiAS said Diageo promoted USL’s CFO PA Murali and actually rewarded him with a Rs 5 crore one-time bonus in FY15, in addition to revising his remuneration upwards. “Would Diageo have similarly rewarded their CFO? Diageo seems to have forgotten and ignored this. It has ignored the fact that the meeting to approve the accounts had to be called not once, not twice, but three times before these could be finalized,” asked IIAS.

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